| BENCHMARK ELECTRONICS INC Item 1A Risk Factors The loss of a major customer would adversely affect us |
| A substantial percentage of our sales have been made to a small number of customers, and the loss of a major customer, if not replaced, would adversely affect us |
| During 2005, our two largest customers together represented 44dtta2prca of our sales, with one customer accounting for 29dtta7prca of our sales |
| Our future sales are dependent on the success of our customers, some of which operate in businesses associated with rapid technological change and consequent product obsolescence |
| Developments adverse to our major customers or their products, or the failure of a major customer to pay for components or services, could have an adverse effect on us |
| We expect to continue to depend on the sales from our largest customers and any material delay, cancellation or reduction of orders from these or other significant customers would have a material adverse effect on our results of operations |
| In addition, we generate significant accounts receivables in connection with providing manufacturing services to our customers |
| If one or more of our customers were to become insolvent or otherwise unable to pay for the manufacturing services provided by us, our operating results and financial condition would be adversely affected |
| We are dependent on the success of our customers |
| We are dependent on the continued growth, viability and financial stability of our customers |
| Our customers are original equipment manufacturers of: · computers and related products for business enterprises; · medical devices; · industrial control equipment; · testing and instrumentation products; and · telecommunication equipment |
| These industries are, to a varying extent, subject to rapid technological change, vigorous competition and short product life cycles |
| When our customers are adversely affected by these factors, we may be similarly affected |
| 10 ______________________________________________________________________ We operate in a highly competitive industry |
| We compete against many providers of electronics manufacturing services |
| Certain of our competitors have substantially greater resources and more geographically diversified international operations than we do |
| Our competitors include large independent manufacturers such as Celestica, Inc, Flextronics International Ltd, Hon Hai Precision Industry Co, Ltd, Jabil Circuit, Inc, Sanmina-SCI Corporation and Solectron Corporation |
| In addition, we may in the future encounter competition from other large electronic manufacturers that are selling, or may begin to sell, electronics manufacturing services |
| We also face competition from the manufacturing operations of our current and future customers, who are continually evaluating the merits of manufacturing products internally against the advantages of outsourcing to electronics manufacturing services providers |
| In addition, in recent years, ODMs that provide design and manufacturing services to OEMs, have significantly increased their share of outsourced manufacturing services provided to OEMs in several markets, such as notebook and desktop computers, personal computer motherboards, and consumer electronic products |
| Competition from ODMs may increase if our business in these markets grows or if ODMs expand further into or beyond these markets |
| During periods of recession in the electronics industry, our competitive advantages in the areas of quick turnaround manufacturing and responsive customer service may be of reduced importance to electronics OEMs, who may become more price sensitive |
| We may also be at a competitive disadvantage with respect to price when compared to manufacturers with lower cost structures, particularly those with more offshore facilities located where labor and other costs are lower |
| We experience intense competition, which can intensify further as more companies enter the markets in which we operate, as existing competitors expand capacity and as the industry consolidates |
| The availability of excess manufacturing capacity at many of our competitors creates intense pricing and competitive pressure on the EMS industry as a whole and Benchmark in particular |
| To compete effectively, we must continue to provide technologically advanced manufacturing services, maintain strict quality standards, respond flexibly and rapidly to customers’ design and schedule changes and deliver products globally on a reliable basis at competitive prices |
| Our inability to do so could have an adverse effect on us |
| We may experience fluctuations in quarterly results |
| These factors include: · the volume of customer orders relative to our capacity; · customer introduction and market acceptance of new products; · changes in demand for customer products; · pricing and other competitive pressures; · the timing of our expenditures in anticipation of future orders; · our effectiveness in managing manufacturing processes; · changes in cost and availability of labor and components; · changes in our product mix; · changes in economic conditions; and · local factors and events that may affect our production volume, such as local holidays |
| Additionally, as is the case with many high technology companies, a significant portion of our shipments typically occurs in the last few weeks of a quarter |
| As a result, our sales may shift from one quarter to the next, having a significant effect on reported results |
| 11 ______________________________________________________________________ Most of our customers do not commit to long-term production schedules, which makes it difficult for us to schedule production and achieve maximum efficiency of our manufacturing capacity |
| The volume and timing of sales to our customers may vary due to: · variation in demand for our customers’ products; · our customers’ attempts to manage their inventory; · electronic design changes; · changes in our customers’ manufacturing strategy; and · acquisitions of or consolidations among customers |
| Our inability to forecast the level of customer orders with certainty makes it difficult to schedule production and maximize utilization of manufacturing capacity |
| Anticipated orders from many of our customers have, in the past, failed to materialize or delivery schedules have been deferred as a result of changes in our customers’ business needs, thereby adversely affecting our results of operations |
| On other occasions, our customers have required rapid increases in production, which have placed an excessive burden on our resources |
| Such customer order fluctuations and deferrals have had a material adverse effect on us in the past, and we may experience such effects in the future |
| A business downturn resulting from any of these external factors could have a material adverse effect on our operating income |
| Our customers may cancel their orders, change production quantities or delay production |
| We generally do not obtain firm, long-term purchase commitments from our customers and we continue to experience reduced lead-times in customer orders |
| Customers may cancel their orders, change production quantities or delay production for a number of reasons |
| The success of our customers’ products in the market affects our business |
| Cancellations, reductions or delays by a significant customer or by a group of customers could negatively impact our operating income |
| In addition, we make significant decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, personnel needs and other resource requirements, based on our estimate of customer requirements |
| The short-term nature of our customers’ commitments and the possibility of rapid changes in demand for their products reduces our ability to accurately estimate the future requirements of those customers |
| On occasion, customers may require rapid increases in production, which can stress our resources and reduce operating margins |
| In addition, because many of our costs and operating expenses are relatively fixed, a reduction in customer demand can harm our gross profits and operating results |
| Start-up costs and inefficiencies related to new or transferred programs can adversely affect our operating results and such costs may not be recoverable if such new programs or transferred programs are cancelled |
| Start-up costs, the management of labor and equipment resources in connection with the establishment of new programs and new customer relationships, and the need to estimate required resources in advance can adversely affect our gross margins and operating results |
| These factors are particularly evident in the early stages of the life cycle of new products and new programs or program transfers and in the opening of new facilities such as our systems integration facility in Ayudhaya, Thailand |
| The effects of these start-up costs and inefficiencies can also occur when we re-open inactive facilities, such as our facility in Korat, Thailand, which began production in the third quarter of 2004 |
| These factors also 12 ______________________________________________________________________ affect our ability to efficiently use labor and equipment |
| Due to the improved economy and our increased marketing efforts, we are currently managing a number of new programs and are expanding our capacity in Suzhou, China |
| Consequently, our exposure to these factors has increased |
| In addition, if any of these new programs or new customer relationships were terminated, our operating results could be harmed, particularly in the short term |
| We may not be able to recoup these start-up costs or replace anticipated new program revenues |
| Complications with the implementation of our new information systems could disrupt our operations and cause unanticipated increases in our costs |
| We have completed the installation of an Enterprise Resource Planning system in most of our manufacturing sites and in our corporate location |
| We expect that we will complete the installation of this system in certain of our remaining plants to replace the existing Manufacturing Resource Planning systems and financial information systems used by these sites within the next year |
| Complications with the implementation of these information systems could result in material adverse consequences, including disruption of operations, loss of information and unanticipated increases in cost |
| We are exposed to general economic conditions, which could have a material adverse impact on our business, operating results and financial condition |
| If the economic conditions and demand for our customers’ products deteriorate, we may experience a material adverse impact on our business, operating results and financial condition |
| In cases where the evidence suggests a customer may not be able to satisfy its obligation to us, we set up reserves in an amount we determine appropriate for the perceived risk |
| There can be no assurance that our reserves will be adequate to meet this risk |
| If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional receivable and inventory reserves may be required |
| We may encounter significant delays or defaults in payments owed to us by customers for products we have manufactured or components that are unique to particular customers |
| We structure our agreements with customers to mitigate our risks related to obsolete or unsold inventory |
| However, enforcement of these contracts may result in material expense and delay in payment for inventory |
| If any of our significant customers become unable or unwilling to purchase such inventory, our business may be materially harmed |
| We may be affected by consolidation in the electronics industry |
| As a result of the current economic climate, consolidation in the electronics industry may increase |
| Consolidation in the electronics industry could result in an increase in excess manufacturing capacity as companies seek to close plants or take other steps to increase efficiencies and realize synergies of mergers |
| The availability of excess manufacturing capacity could create increased pricing and competitive pressures for the electronics manufacturing services industry as a whole and our business in particular |
| In addition, consolidation could also result in an increasing number of very large electronics companies offering products in multiple sectors of the electronics industry |
| The growth of these large companies, with significant purchasing and marketing power, could also result in increased pricing and competitive pressures for us |
| Accordingly, industry consolidation could harm our business |
| We are subject to the risk of increased taxes |
| We base our tax position upon the anticipated nature and conduct of our business and upon our understanding of the tax laws of the various countries in which we have assets or conduct activities |
| Our tax position, however, is subject to review and possible challenge by taxing authorities and to possible changes 13 ______________________________________________________________________ in law |
| We cannot determine in advance the extent to which some jurisdictions may assess additional tax or interest and penalties on such additional taxes |
| Several countries in which we are located allow for tax holidays or provide other tax incentives to attract and retain business |
| We have obtained holidays or other incentives where available |
| Our taxes could increase if certain tax holidays or incentives are retracted, or if they are not renewed upon expiration, or tax rates applicable to us in such jurisdictions are otherwise increased |
| In addition, further acquisitions may cause our effective tax rate to increase |
| We are exposed to intangible asset risk |
| We have recorded goodwill in connection with business acquisitions |
| We are required to perform goodwill impairment tests at least on an annual basis and whenever events or circumstances indicate that the carrying value may not be recoverable from estimated future cash flows |
| As a result of our annual and other periodic evaluations, we may determine that the intangible asset values need to be written down to their fair values, which could result in material charges that could be adverse to our operating results and financial position |
| There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with US GAAP Any changes in estimates, judgments and assumptions could have a material adverse effect on our business, financial position and results of operations |
| The consolidated financial statements included in the periodic reports we file with the SEC are prepared in accordance with accounting principles generally accepted in the United States (US GAAP) |
| The preparation of financial statements in accordance with US GAAP involves making estimates, judgments and assumptions that affect reported amounts of assets (including intangible assets), liabilities and related reserves, revenues, expenses and income |
| Estimates, judgments and assumptions are inherently subject to change in the future, and any such changes could result in corresponding changes to the amounts of assets, liabilities, revenues, expenses and income |
| Any such changes could have a material adverse effect on our financial position and results of operations |
| Our international operations may be subject to certain risks |
| During 2005, 2004 and 2003, 34dtta8prca, 30dtta2prca and 27dtta0prca, respectively, of our sales were from our international operations |
| These international operations may be subject to a number of risks, including: · difficulties in staffing and managing foreign operations; · political and economic instability; · unexpected changes in regulatory requirements and laws; · longer customer payment cycles and difficulty collecting accounts receivable; · export duties, import controls and trade barriers (including quotas); · governmental restrictions on the transfer of funds; · burdens of complying with a wide variety of foreign laws and labor practices; · fluctuations in currency exchange rates, which could affect component costs, local payroll, utility and other expenses; and · inability to utilize net operating losses incurred by our foreign operations to reduce our US income taxes |
| 14 ______________________________________________________________________ In addition, several of the countries where we operate have emerging or developing economies, which may be subject to greater currency volatility, negative growth, high inflation, limited availability of foreign exchange and other risks |
| These factors may harm our results of operations, and any measures that we may implement to reduce the effect of volatile currencies and other risks of our international operations may not be effective |
| In our experience, entry into new international markets requires considerable management time as well as start-up expenses for market development, hiring and establishing office facilities before any significant revenues are generated |
| As a result, initial operations in a new market may operate at low margins or may be unprofitable |
| We cannot assure you that our international operations will contribute positively to our business, financial conditions or results of operations |
| We are involved in legal proceedings |
| An unfavorable decision in any of these proceedings could have a material adverse effect on us |
| In the past, we have been notified of claims relating to various matters including intellectual property rights, contractual matters or other issues arising in the ordinary course of business |
| In the event of such a claim, we may be required to spend a significant amount of money to defend or otherwise address the claim |
| Any litigation, even where a claim is without merit, could result in substantial costs and diversion of resources |
| Accordingly, the resolution or adjudication of such disputes, even those encountered in the ordinary course of business, could have a material adverse effect on our business, consolidated financial conditions and results of operations |
| See Note 15 to the consolidated financial statements in Item 8 of this report |
| Our success will continue to depend to a significant extent on our executives |
| We depend significantly on certain key executives, including, but not limited to, Cary T Fu, Gayla J Delly and Steven A Barton |
| The unexpected loss of the services of any one of these executive officers would have an adverse effect on us |
| We must successfully integrate the operations of acquired companies to maintain profitability |
| Our capabilities have continued to grow through acquisitions and we may pursue additional acquisitions over time |
| These acquisitions involve risks, including: · integration and management of the operations; · retention of key personnel; · integration of purchasing operations and information systems; · retention of the customer base of acquired businesses; · management of an increasingly larger and more geographically disparate business; and · diversion of management’s attention from other ongoing business concerns |
| Our profitability will suffer if we are unable to successfully integrate and manage any future acquisitions that we might pursue, or if we do not achieve sufficient revenue to offset the increased expenses associated with these acquisitions |
| 15 ______________________________________________________________________ We must maintain our technological and manufacturing process expertise |
| The market for our manufacturing services is characterized by rapidly changing technology and continuing process development |
| We are continually evaluating the advantages and feasibility of new manufacturing processes |
| We believe that our future success will depend upon our ability to develop and provide manufacturing services which meet our customers’ changing needs |
| This requires that we maintain technological leadership and successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis |
| We cannot assure you that our process development efforts will be successful |
| Environmental laws may expose us to financial liability and restrictions on operations |
| We are subject to a variety of federal, state, local and foreign environmental laws and regulations relating to environmental, waste management, and health and safety concerns, including the handling, storage, discharge and disposal of hazardous materials used in or derived from our manufacturing processes |
| If we or companies we acquire have failed or fail in the future to comply with such laws and regulations, then we could incur liabilities and fines and our operations could be suspended |
| Such laws and regulations could also restrict our ability to modify or expand our facilities, could require us to acquire costly equipment, or could impose other significant expenditures |
| In addition, our operations may give rise to claims of property contamination or human exposure to hazardous chemicals or conditions |
| Shortages or price increases of components specified by our customers would delay shipments and adversely affect our profitability |
| Substantially all of our sales are derived from electronics manufacturing services in which we purchase components specified by our customers |
| In the past, supply shortages have substantially curtailed production of all assemblies using a particular component |
| In addition, industry-wide shortages of electronic components, particularly of memory and logic devices, have occurred |
| If shortages of these components occur or if components received are defective, we may be forced to delay shipments, which could have an adverse effect on our profit margins |
| Because of the continued increase in demand for surface mount components, we anticipate component shortages and longer lead times for certain components to occur from time to time |
| Also, we typically bear the risk of component price increases that occur between periodic repricings during the term of a customer contract |
| Accordingly, certain component price increases could adversely affect our gross profit margins |
| Our common shares have experienced significant price volatility, and such volatility may continue in the future |
| The price of our common shares could fluctuate widely in response to a range of factors, including variations in our reported financial results and changing conditions in the economy in general or in our industry in particular |
| In addition, stock markets generally experience significant price and volume volatility from time to time which may affect the market price of our common shares for reasons unrelated to our performance |
| 16 ______________________________________________________________________ Provisions in our shareholder rights plan, our charter documents and state law may make it harder for others to obtain control of our company even though some shareholders might consider such a development to be favorable |
| Our shareholder rights plan, provisions of our amended and restated articles of incorporation and the Texas Business Corporation Act may delay, inhibit or prevent someone from gaining control of our company through a tender offer, business combination, proxy contest or some other method |
| These provisions include: · a “poison pill” shareholder rights plan; · a statutory restriction on the ability of shareholders to take action by less than unanimous written consent; and · a statutory restriction on business combinations with some types of interested shareholders |
| Recently enacted changes to financial accounting standards will affect our reported results of operations and could result in a decrease in the value of your shares |
| In December 2004, the Financial Accounting Standards Board published amendments to financial accounting standards that will require that awards under employee stock option and employee stock purchase plans be treated as compensation expense using the fair value method |
| This amendment will be effective for our first quarter of 2006 |
| Based on preliminary estimates, the future compensation cost to be recognized as a result of the adoption of this revised standard for the year ended December 31, 2006 will be dlra1dtta8 million |
| In addition, for any new awards that may be granted during 2006, we will incur additional expense that cannot yet be quantified |
| See Note 1 to the Consolidated Financial Statements in Item 8 of this report |
| Impact of Governmental Regulation Our worldwide operations are subject to local laws and regulations |
| Of particular note at this time are two European Union (EU) directives, the first of which is the Restriction of Certain Hazardous Substances Directive (RoHS) |
| Effective July 1, 2006, this directive restricts the distribution of products within the EU containing certain substances, including lead |
| While the enabling legislation of most EU member countries has not yet been enacted, and the implementing details not yet known, it appears we will not be able to sell non-RoHS compliant products to most customers who intend to sell their finished goods into the EU after the effective date |
| In addition, industry analysts indicate that similar legislation in the US and Asia will eventually follow |
| The second directive is the Waste Electrical and Electronic Equipment Directive, effective August 13, 2005, under which a manufacturer or importer will be required, at its own cost, to take back and recycle all of the products it manufactured in or imported into the EU Both directives will affect the worldwide electronics, and electronics components, industries as a whole, and collaborative efforts among suppliers, distributors and customers to develop compliant processes have begun |
| The cost of such efforts, the degree to which we will be expected to absorb such costs, the impact that the directive may have on product shipments, and our liability for non-compliant product is not yet known, but could have a material effect on our operations and results |
| If we or our customers fail in the future to comply with such laws and regulations, then we could incur liabilities and fines and our operations could be suspended |
| Recently, the Chinese government revalued its currency against the US dollar |
| The Chinese currency has held relatively fixed to the US dollar for numerous years, but now the Chinese government appears to be adopting a managed float policy (allowing its currency to move in a tight range up or down from the 17 ______________________________________________________________________ previous day’s close) |
| As our Asian operations expand, our failure to adequately hedge foreign currency transactions and/or currency exposures associated with assets and liabilities denominated in non-functional currencies could adversely affect our financial condition, results of operations and cash flows |
| We could incur a significant amount of debt in the future |
| We have the ability to borrow approximately dlra128dtta5 million under our revolving credit facilities |
| In addition, we could incur additional indebtedness in the future in the form of bank loans, notes or convertible securities |
| An increase in the level of our indebtedness, among other things, could: · make it difficult for us to obtain any necessary financing in the future for other acquisitions, working capital, capital expenditures, debt service requirements or other purposes; · limit our flexibility in planning for, or reacting to changes in, our business; and · make us more vulnerable in the event of a downturn in our business |
| There can be no assurance that we will be able to meet any future debt service obligations |
| We may be exposed to interest rate fluctuations |
| We will have exposure to interest rate risk under our variable rate revolving credit facilities to the extent we incur indebtedness under such facilities |
| These facilities’ interest rates are based on the spread over the bank’s Eurodollar rate or its prime rate |
| Changes in the securities laws and regulations are likely to increase our costs |
| The Sarbanes-Oxley Act of 2002 has required changes in some of our corporate governance, securities disclosure and compliance practices |
| In response to the requirements of that Act, the Securities and Exchange Commission and the New York Stock Exchange have promulgated new rules on a variety of subjects |
| Compliance with these new rules has increased our legal and financial and accounting costs, and we expect these increased costs to continue indefinitely |
| These developments may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be forced to accept reduced coverage or incur substantially higher costs to obtain coverage |
| Likewise, these developments may make it more difficult for us to attract and retain qualified members of our board of directors or qualified executive officers |
| Our business may be impacted by geopolitical events |
| Geopolitical events such as terrorist acts may effect the overall economic environment and negatively impact the demand for our customers’ products |
| As a result, customer orders may be lower and our financial results may be adversely affected |
| Our business may be impacted by hurricanes, epidemics and other natural disasters |
| Hurricanes, epidemics and other natural disasters could negatively impact our business |
| In some countries in which we operate, such as China and Thailand, potential outbreaks of severe acute respiratory syndrome and/or bird flu could disrupt our manufacturing operations, reduce demand for our customers’ products and increase supply chain costs |
| Some of our facilities, including our corporate headquarters, are located in areas which may be impacted by hurricanes and/or other natural disasters |